Should You Rent or Buy a Home in Retirement?

Here's how to run the numbers to find out

When Jane Bennett Clark, 64, thought about downsizing in advance of retirement, she imagined selling her four-bedroom house in Takoma Park, Md., and purchasing a smaller home or condo. The idea of renting never occurred to her.

“I thought cashing out the equity [in my current home] and using it to buy a new home was the most appealing option,” explains Clark, a senior editor for Kiplinger’s Personal Finance magazine. Touring a new apartment building in her neighborhood, however, made Clark rethink her plans. She loved its urban location and modern design.

But after running the numbers, Clark decided she’d be better off purchasing a condo instead of renting. In fact, her calculations showed that unless the rent was $1,250 per month — half what the apartment she saw charged — it made more financial sense to purchase a condo priced at $350,000 or less.

Like Clark, retirees and pre-retirees considering downsizing often struggle with the decision of whether to rent or buy. “At this point in their lives, people are very accustomed to the idea of homeownership and it’s hard to give that up,” says Clark. But, she notes, “there are some real advantages to renting — and pre-retirees often don’t take time to think through those advantages.”

Weighing the Options

The decision of whether to rent or buy in retirement requires careful consideration, says Brent Neiser, a certified financial planner and senior director, strategic programs and alliances for the Denver-based National Endowment for Financial Education. “You have to do your due diligence,” he says.

Although the median home price rose 4.7 percent between August 2014 and August 2015, there’s no guarantee a home’s value will increase.

There are obvious advantages to owning a home in retirement — mortgage interest and property tax write-offs; the ability to benefit from potential price appreciation and build equity and the chance to make the place look the way you want, by tearing up carpet or tearing down walls.

But there are downsides, too: the cost of maintenance and repairs; tapping equity requires a lender’s approval and selling takes time and effort (plus it comes with a glut of paperwork).

Renting has upsides, also. For starters, it’s flexible: Want to test out a smaller home or one-level living? Plan to move from an urban center to a quiet coastal town? Renting is a good option. If the move turns out to be a bad idea, you can just move on.

Renting can also be cheaper than buying, both initially and continually. Instead of coming up with a sizable down payment, you’d only be required to pay the first month’s rent and a security deposit. You don’t have to budget for maintenance and repair costs, or condo association fees or property taxes.

In addition, an apartment building could offer aging-in-place amenities such as elevators, wheelchair access and bathroom grab bars, notes Neiser.

Renting can also let you deploy your money to help boost your finances in retirement. You could use the cash from the sale of your home to build your nest egg by investing in mutual funds, annuities, stocks or bonds.

Run the Numbers

The decision of whether you should rent or buy in retirement often comes down to the particular dollars and cents of your situation.

First, add up the costs of homeownership where you might buy, including a mortgage, property taxes, homeowners insurance, utilities and maintenance.

As for potential appreciation, although the median home price rose 4.7 percent between August 2014 and August 2015 according to the National Association of Realtors, there’s no guarantee that a home’s value will increase. Even if yours does, says Clark, you need to live in it long enough for the appreciation to cover closing costs, which takes an average of five years.

Next, run the numbers for renting, calculating the average rents in the area where you might be a tenant.

Rents have been soaring in many places lately because the rental vacancy rate (roughly 7 percent) is near 21-year lows. Bloomberg BusinessWeek, citing statistics from Zillow, reports that the nationwide median monthly rent is roughly $1,400, up 14 percent from 2011. And, according to a Rent.com survey, 68 percent of property managers predict rents will rise in the next year by an average of 8 percent.

In its recent rankings of the most expensive U.S. cities for renters, Business Insider reported that the average rents in upscale Los Angeles neighborhoods (which top out at $10,629 per month) are the most expensive in the nation while rents in San Francisco and New York are the most expensive per square foot.

Remember, when doing your rent vs. buy comparison, to take into account the tax implications of selling your current home and moving to a rental, including any capital gains taxes on the sale and the current deductions you’ll give up by switching from homeownership to renting.

For help crunching the numbers, The New York Times has a useful, free online calculator to help you determine the costs of renting versus buying.

Jodi Helmer writes about business and finance for Next Avenue, Entrepreneur, CBSMoneyWatch, Arrive and CreditCards.com. She’s saving her pennies to renovate a vacation home in the mountains of North Carolina. Visit her online at jodihelmer.com.